Kforce Inc (KFRC) 2009 Q1 法說會逐字稿

Good day, everyone, and welcome to the Kforce Inc. First Quarter 2009 Earnings Results Conference Call. As a reminder, today's call is being recorded.

At this time, I would like to turn the call over to Mr. Michael Blackman, Senior Vice President of Investor Relations. Please go ahead, sir.

Great. Good afternoon, and welcome to the Q1 Kforce conference call. Before we get started, I would like to remind you that this call may contain statements that are forward-looking. These statements are based upon current expectations and assumptions that are subject to risks and uncertainties. Actual results may differ materially because of factors listed in Kforce's 10K, 10Q and other reports and filings with the Securities & Exchange Commission. We do not undertake any duty to update any forward-looking statements. I would now like to turn the call over to David Dunkel, Chairman and Chief Executive Officer. Dave?

Thank you, Michael.

You can find additional information about Kforce in our 10Q, 10K and 8K filings with the SEC. We provide substantial disclosure in our release and our hope is that this will improve the dissemination of information about our performance and the quality of this call.

We are very pleased with our team's performance against the challenging macro economic environment. Our goal is to provide solutions to our clients, to meet their talent needs which we believe results in gaining market share even in this environment. We also believe the years of preparation and our focus on building a strong culture are allowing us to make progress toward our goals. Our revenue and EPS results compare very favorably in our sector and suggest we may be gaining share.

Since the beginning of the year, I have personally traveled across the country and visited with over 20 clients representing a mix of our large national accounts and significant market-base clients. What came through consistently is that our people are performing very well and are providing our clients the exceptional talent they require. As vendor lists consolidate, we will continue to be short listed due to our performance, quality, scale and delivery capability. The financial strength of Kforce is frequently mentioned as an important factor as well.

While the economic downturn and uncertainty have constrained demand and slowed down the hiring process, we believe that the recession has masked the underlying secular drivers for highly skilled knowledge workers. Our clients remain concerned about their ability to meet their talent needs as the recovery takes hold.

During the quarter, we completed the integration of deNovis and the KGS and we are very pleased with the success of that integration. Our KGS unit has now achieved sufficient scale at over $100 million to allow us to compete on larger, more significant projects. I am particularly pleased at the great team that has come together and look forward to great results.

Taking stock of where we are strategically, we believe that the cards are played for this part of the cycle. As I have mentioned previously, we've been preparing since the last downturn and are pleased with our results.

With that said we are now drawing our hand for the coming up cycle and implementing plans that should produce accelerated revenue and earnings growth. We believe that our portfolio of services positions us very well for the coming turn and that we have operating leverage to fuel EPS growth. We will use cash flow for debt retirement, share repurchase and acquisitions that meet a very high hurdle.

I would also like to reiterate our priority to maintain positive cash flow and to retain and redeploy our great people.

I will now turn the call over to Bill Sanders, Kforce President, who will provide his comments; followed by Joe Liberatore, Kforce CFO, who will then provide additional insights on operating trends and expectations; and then I will conclude. William?

Thank you, Dave, and thanks to all of you for your interest in Kforce.

We are pleased with our performance in the first quarter against the backdrop of a difficult operating environment. We believe our relative success in maintaining our revenue stream and our earnings performance is primarily the result of our great people, our diverse service offering that is primarily domestic, and the quality and speed of our national recruiting center which is particularly effective delivering to our large national accounts.

Revenues of $231.3 million declined four percent sequentially driven primarily by declines in our finance and accounting and technology flexible staffing businesses and our search business. Flex revenues, which represent 97% of our revenue stream, decreased 2.1% sequentially to $223.5 million. Our largest 25 clients were 38.6% of our quarterly revenue.

Our technology business segment declined 8.7% sequentially. Technology search continued to struggle and declined 49.2% sequentially. Our technology flex business which represents roughly half of our total firm revenues decreased 7.1% sequentially and is down only 4.8% year over year.

A decline in tech flex was anticipated due to the typical job ins that we see at the end of each year that must be rebuilt during the first quarter. This rebuild happened at roughly the same pace as the last two years; however, the tech flex revenue run rate began to stabilize in March at a lower level than Q4 2008 which contributed to the sequential decline. Recent trends for tech flex are slightly down from March levels but relatively stable. We, therefore, expect tech flex to be down slightly in Q2.

Our finance and accounting business, which now represents 17.5% of our total revenues, was down 12.6% sequentially and 29.5% year over year. This decline was felt in both our flex business which declined 8.1% sequentially and our F&A search business which declined 36.8% sequentially.

One bright spot in our F&A business has been in providing mortgage related services. We have built a low cost, centralized delivery model for this business through our national recruiting center and have seen approximately ten percent growth here in Q1. However, given the relatively small size of our mortgage related business, it does not offset the weak market conditions for the rest of our F&A business which has been most significantly impacted by the current recession. We are seeing some promising signs as F&A flex revenues have been stable since February and Q2 revenues are expected to be flat with Q1.

Our HLS business segment is made up of two businesses -- clinical research and healthcare. During Q1, our clinical research business grew 8.7% sequentially and three percent year over year, and healthcare declined 12.3% sequentially and 10.7% year over year.

I would like to congratulate clinical research for being the recipient of Kforce's [Aberdeen Dunkel Award] for being recognized as the Market of the Year for 2008 and the recipient of the 2008 Pfizer Strategic Supplier of the Year recognition.

We expect low revenue visibility for clinical research and potential revenue declines over the next few quarters as we continue to see a consolidation and restructuring into large bio-pharma space. In the longer term, we believe the quality of our relationships with the strongest companies in this space will provide opportunities for continued growth.

Our healthcare business started the year at a slower pace than recent years and the trends are showing a continued slower pace in 2009 versus 2008. This revenue decline is largely due to a reduction in hospital census and nine out of ten hospital reported cutting back to address economic concerns.

The rapid growth of this business over the past three years now requires us to restructure and expand to the focus of business development to reach a greater population of clients. We expect revenues to decline in Q2 and be challenged throughout 2009 as a result of these impacts.

Our government business had sequential growth of 35.1% and a year over year growth of 54.5%. Last quarter, the firm acquired deNovis RDI, a $34 million government contractor in the technology space which has been substantially integrated into KGS at this point. We continue to be very pleased with the excellent job being done by Larry Grant and Glen Shaffer in regards to integrating and growing our government business.

This integration is now substantially complete and we will now be able to differentiate its revenues contribution moving forward. However, our Q1 results suggest that revenue for KGS, exclusive of any contribution from the acquisition, was up 8.9% sequentially and 7.5% year over year despite the loss of a billing day due to the closing of federal businesses on inauguration day.

Though 2009 is a year where we have re-competes on some of our largest contracts, we continue to be optimistic about the growth prospect of this business as some of our recent contract awards suggest that the recent delays we have experienced are starting to ease. Federal activity looks to be promising in the areas such as healthcare, data integrity, finance and technology services where are our business is concentrated.

We expect continued growth in KGS throughout Q2 and 2009 and believe they will be a key component of our long term growth strategy.

Search revenues, which were only 3.4% of total revenues in Q1, declined 38.8% sequentially and 56% year over year. Search activity continued to decline in Q1 more rapidly than in previous downturns. We expect search to continue to decline in Q2.

As we continue to navigate through the current economic environment, we're looking at internal KPIs as one of our primary, near term forecasting tools. These KPIs were down in Q1 from Q4 levels, but had begun to stabilize near the end of the quarter.

We continue to diligently manage the performance of our sales associates with heightened focus on productivity and exiting under performers more quickly. As a result, sales per employee has increased by 1.2% year over year reflecting this focus on productivity and aligning headcount with the revenue stream.

We will continue to balance revenue and expenses. Our focus includes retaining and inspiring our top performers for the eventual economic upturn. While total revenues have decreased 7.5% year over year, total sales headcount is 6.9% less than last quarter and 17.1% less than a year ago.

As we consider the total Kforce business footprint, we believe we are very well positioned to both maximize market share in this current recession as well as to be positioned to take advantage of opportunities when the economy rebounds. As I mentioned, our government and KCR businesses, which constitute 25% of our revenue stream, our focused on stable, long term contracts.

Our decision coming out of the last downturn to manage search to be less than ten percent of total revenues has allowed us to minimize its impact on our profitability and future prospects. We believe our stable, primarily domestic diversified portfolio of service offerings is a significant differentiator in the marketplace and a key contributor to our long term financial stability.

We also continue to look to ways to strengthen our operating model to more efficiently meet the needs of our clients, improve profit potential, and expand market share. Examples of this include leveraging our centralized national recruiting center to provide fast, cost efficient access to high quality candidates for our clients, the continued implementation of scale of our volume account strategy, and the continued investment in the stable and profitable prime federal government contracting business.

We believe that we are well prepared to weather to weak labor markets and we continue to lay the foundation to accelerate growth to reach new revenue and earnings peaks in the coming economic cycle. We understand that our clients believe our services are a cost effective way to acquire talent. Our immediate plans are to continue to have a relentless focus on our keeping our great people and to improve client satisfaction while balancing revenue and expenses.

I'll now turn the call over to Joe Liberatore, our Chief Financial Officer. Joe?

Thank you, Bill.

The firm continued its strong performance in Q1 coming in at the middle of guidance for revenue and at the high end of guidance for earnings per share. We're pleased with our relative performance in this challenged business environment. We believe the first quarter is a reflection of our strong culture and extreme focus on execution with our clients, as well as those items that we can control such as expense management.

Revenues for the quarter of $231.3 million were down 7.5% from Q1 2008 and down four percent sequentially.

Flex revenues of $223.5 million were down 2.1% sequentially and 3.8% year over year. Generally speaking, flex revenues on a monthly basis as compared to prior year levels were down in each month of the quarter though they began to stabilize in March particularly in technology and F&A flex.

Search revenues of $7.8 million continued to see the increasing impacts of the economic slowdown. Search declined 38.8% sequentially and 56% year over year. Monthly search revenues were also down each month of the quarter compared to the prior year and have not yet seen signs of stabilization.

Revenue trends for the beginning of the second quarter of 2009 have been mixed versus 2008 activity. Flex revenues for the first four weeks of April are down six percent year over year, with tech flex down 9.7% year over year, and finance and accounting down 20.5% year over year.

For comparability purposes, these numbers exclude the week of Easter and Good Friday due to the fact that Easter fell into Q1 in 2008.

The deterioration in search revenues which have declined significantly the past two quarters continues as search is down 71.9% year over year for the first five weeks of Q2 2009. We caution that it's difficult to draw conclusions for Q2 based upon this limited data.

The firm recorded net income of $3.2 million and earnings per share of $0.08 in Q1 2009. For comparability purposes Q4 2008 net income was $7.4 million, and earnings per share was $0.19 on a pro forma basis after excluding the affect of the $129.4 million pretax impairment chart. These declines are largely the result of the reduction in search revenues and flex gross margins which we primarily offset by the reduction in operating expenses.

Our overall gross profit percentage of 31.2% has decreased 320 basis points year over year and decreased 230 basis points sequentially. The sequential and year over year declines are primarily the result of changes in business mix attributable to the decline in our search business.

Our flex gross profit percentage of 28.8% in Q1 2009 has declined only 60 basis points year over year and 100 basis points sequentially from Q4 2008. The sequential decline in flex gross margin was impacted by approximately 50 basis points by the increase in payroll taxes payable at the beginning of each year.

The relative stability in our flex gross profit percentage is the result of aggressive management of the spread between bill rate and pay rates. This is especially true in tech flex -- our largest business -- where gross margins have declined only 30 basis points year over year. In general, we've been successful with balancing pay rate reductions with reduced bill rates as we have passed client bill rate reductions to our billable consultants.

As we look forward to Q2 and beyond, we would expect continuation in bill rate/pay rate compression due to pricing pressure and the lag of our ability to reduce pay rates as quickly as declining bill rates. However, this impact will somewhat be mitigated by the continued shift of our business mix to higher margin business, as well as increasing support in the recruiting process by our national recurring center.

The firm is aggressively managing operating expenses. We continue to highly scrutinize very expense to ensure a proper return on our investment and alignment of the cost structure with the revenue stream, including variable costs such as travel and entertainment, lease costs, and FTEs.

Operating expenses -- which include a 20 basis point increase is the result of increased payroll taxes -- remained low at 28.7% in Q1, an increase of 10 basis points from 28.6% in Q4 2008 and a decrease of 100 basis points from 29.7% in Q1 2008. The majority of our cost structure is variable and compensation expense, which is highly correlated to gross profit, comprises over 75% of our operating expenses.

We continue to see leverage in our non-compensation base cost structure as a result of the infrastructure investments made over the past four years and completed in late 2007. These significant capital expenditures have prepared the firm well for the future without requiring significant additional expenditures.

We expect operating efficiencies to continue to evolve and corresponding leverage and earnings over the next few years as these efforts become fully depreciated. Capital expenditures are expected to continue to moderate into this year.

Should revenues continue to decline, we will continue to manage expenses aggressively with a priority on keeping the great people in our firm and maintaining positive cash flow. Though operating expenses will decline as revenues decline, they will likely do so at a slower rate resulting in decreased profitability.

EBITDA, an indication of the firm's strong cash flow, was $9.8 million or $0.25 per share in Q1 2009, as compared to $17.5 million or $0.43 per share in Q1 2008. Our strong operating cash flow is a source of significant stability.

Debt increased to $44 million at the end of Q1 from $38 million largely as the result of the timing of compensation related items in Q1. However, as of today debt is currently $37.3 million.

There were no material stock repurchases during Q1 and the firm has $74.5 million available for future stock repurchases under the current Board of Director's authorizations. The firm has always taken a conservative view when balancing the use of its cash flows between debt retirement, stock repurchases and acquisitions as evidenced by our proven track record of significant debt retirement after an acquisition.

We will continue to balance the opportunities that present themselves with respect to stock repurchases and acquisitions. Our priority is to maintain maximum flexibility in this uncertain environment with a focus on debt reduction.

The firm continues to have significant availability under its credit facility which does not expire until November 2011 to meet its funding needs.

Our accounts receivable portfolio continues to perform very well with only minimal writes in Q1. Receivable days to over 60 days decreased from $8.6 million at the end of Q4 to $5 million at the end of Q1; however, we believe that significant risk remains for future defaults in this uncertain economic environment. Our allowance for doubtful accounts is currently $6.2 million and we believe it's sufficient to account for the current risk.

In terms of guidance for the second quarter, we expect revenues may be in the $220 million to $227 million range, total firm earnings per share may be between $0.05 and $0.09 which reflects an effective tax rate of 41.7% and approximately 39 million weighted average diluted shares outstanding.

The bottom end of guidance reflects a continued deterioration from April results for flex revenue, and results consistent with April trends for search revenue, as well as a decline in flex gross profit attributable to continued margin compression. The second quarter of 2009 has 64 billing days versus 62 billing days in the first quarter of 2009.

Our guidance does not consider the potential non-cash charge related to the acceleration of vesting of long term incentive equity grants made to management. These grants contain a performance provision to accelerate vesting should the firm's stock price appreciate from its issue price by 50% for ten trading days.

We continue to invest in our business to prepare for the upturn, but also we have moved aggressively to control costs during this recession. We believe we are well positioned during these difficult times as a result of the actions taken over the past few years to increase flexibility and leverage.

From a financial perspective, we are pleased with first quarter results. We have the quality revenue stream and balance sheet that will survive this recession and allow a strong performance in the up cycle.

I would like to now turn the call back over to our CEO Dave Dunkel for questions. Dave?

Thank you, Joe.

Also joining us today for Q&A is Larry Grant, President of KGS. We thought it would be helpful to have Larry here to answer specific questions about things that are going on in the government.

[Kevin], we'd like to go ahead and open up the call to questions.

(Operator Instructions)

And we'll go first to Kevin McVeigh with Credit Suisse.

Great. Thank you very much. Hey, nice job on the quarter in an obviously very difficult environment.

Thank you, Kevin.

You're welcome.

I wonder if you could just spend a minute -- obviously the tech business on a relative basis has been very, very resilient. If you could kind of rank order -- things like a benefit from vendor consolidation, cross selling opportunities -- just to try to get our hands around what's been driving a lot of the resiliency. Obviously the health of the balance sheet is helping as well.

Kevin, this is Bill. I would say the number one reason that we continue to perform fairly well relative to the sector in tech is because of our volume national account strategy, along with the national recruiting center. These two have -- these two groups combined have put together a platform for which it's working extremely well with our national accounts and it continues to be -- we continue to be selected as the preferred provider as Dave mentioned earlier in his prepared remarks.

So that's the primary reason is simply high quality candidates being delivered at a very high speed, so that along with the culture that we have built over the last ten years is working to our best advantage.

Hey, Bill, if you think about a percentage -- and not to try to get exact numbers -- percentage of that business is national accounts today as opposed to last cycle, can you frame that out for us?

For the last -- well as I said in my prepared remarks, the largest 25 accounts are 38.6% of our revenue. I would say in our last cycle it would not -- I don't have that number in front of me but it would be significantly less, Kevin.

And so I think we are performing -- in that particular area we are well out performing how we performed in the bottom of the last cycle in this particular area and that is with substantially building a platform for us to continue to produce. And by the way it will help us very much so in the up cycle and we continue to perform.

Hey, Kevin, this is Dave. I think one of the things that's important also is that the culture and the teamwork between our field team and the NRC is really -- it's taken a long time to get that process to this level. But the way they're working together has really sped up the business, delivered very high quality talent to the clients.

And as I mentioned in my cross country trip I consistently heard from our clients that your people are doing an exceptionally good job in delivering great people for us. And that's -- those are clients -- international clients and also significant market-base clients as well.

Great. And Dave, this is a question for you and then I'll get back in the queue or whomever you think makes sense. Obviously the health of the company during this cycle is much stronger relative to the last cycle given the diversification, revenue, things like that.

What have you been able to do through this down cycle that you weren't able to do last cycle and more so as we think about coming out of this as we are? Were you really going to be able to benefit as a result of actions you've taken this cycle as opposed to last cycle?

Well thank God it's not like it was last cycle. I don't know if I could live through another one of those. The biggest difference is we had just gone through a major acquisition and gone through the whole internet strategy and so we had gone through a fairly significant transition. Search at that time was 23% of our revenues.

But I would say to you that there's a maturation and a gelling process that's taken place. As we mentioned before we began preparing for this downturn after the last one. We made very specific strategic decisions that related to such things as the evolution and creating of our national recruiting center which grew out of our internet strategy. The way we went after national accounts, the specific service offerings we went after. As Bill mentioned in his remarks the way we attacked search delivering that from power centers and supporting it with a team in the NRC.

So there were a number of things that we did. There were also significant strategic decisions. One being the exiting of nursing and scientific and focusing HLS and healthcare and KCR, and then of course the big one was going into the government business. And that decision really was made four -- almost five years ago as we looked forward strategically and systematically brought the team together.

So as I look at it I would say it really was -- it wasn't one big thing, it was just a process and an evolution, watching the management team gel, and the way the culture has formed. And I've always believed the culture is the most difficult thing to build and it's the hardest thing to replicate and I'm very pleased with where our culture is today.

Yes, and Kevin, this is Joe. What I would add to that given I was in the field during the last downturn. The way I would describe it is last time around our field leaders were doing everything they could to survive. This time around they're doing everything they can do to thrive.

We have markets that are actually growing in this environment, and I'll tell you what that's every one of our field leaders' objective is to grow in this environment and to take market share. And that wasn't even on the radar last time around.

Great, that's helpful. Thank you.

Thank you.

We'll go next to Mark Marcon with R.W. Baird.

Good afternoon and clearly you're winning share on the IT flex side. I'm wondering who are you gaining it from? And secondly, you know the gross margins -- the flex gross margins -- the degradation there is diminimous considering the environment.

I know that you're passing along the bill rate declines to the -- to your clients, but when we take a look at your hourly rates they haven't changed that much. It looks like you're holding pricing up. I'm wondering if you can talk a little bit about how you're able to do that?

I'll take the market share piece of it and then give it over to Bill. But the thing -- talking to the clients is really interesting because what I asked them specifically is what are you seeing with local partners, regional partners and national partners. And many local providers have gone out of business. You know many of those businesses frankly were financed on home equity loans and with what happened with real estate they're not able to finance the businesses. So we've seen many of them exit.

National players I think one of the things that I heard from our national accounts very clearly was they were looking strategically at who was going to be their partner -- not just today, but three, four, five years from now, -- who had a strategy that was going to allow them to -- not only in this environment where we have reduced demand but in the coming up cycle where once again shortages will likely come, -- who's going to be able to deliver at scale across the platform.

And then the final thing that I heard consistently was financial strength -- very concerned about who was going to survive this downturn and who had the ability to be their partner for the long term.

So market share comes in a lot of different ways. I will say that we've got an aggressive and competitive field team. They want to win; they relish it. And Joe said it well -- they're focused on share this time not surviving. Bill?

Well the thing I would add, Dave, is as we watch this take place as we did in the last cycle, we see a lot of our competition also letting go of top sales associates and recruiters as market share continues to decline for them.

When you turn to margin, I think when you look at our large national accounts -- and they are aggressive on margins more so than anybody else -- but as we indicated we have been -- as Joe said in his prepared remarks -- we are passing that on to our consultants. And so that is helping the percentage itself to stay fairly healthy although sometimes the dollar amount is compressing. Joe, do you want to add anything?

I mean I really summarized it as just a recap when we look at year over year -- you know bill rates down 2.6% in tech and pay rates are down 2.4% sequentially -- bill rates down 1.4% and pay rates just down a tenth of a percent. So for the most part that's what is happening.

In speaking with our CO leaders, I think there's a broader awareness this time around than last time just because of the nature of this downturn and how it's impacted so many consumers. So I think our consultant base out there understands the dynamics that are going on so I think they're much more of a partner this time around than what we experienced last time.

Great. And I'm wondering if you can talk a little bit about the healthcare side and just -- you made some comments about that being a little bit challenging in the near term. Can you give us a little bit more of a feel in terms of how much of a degradation you would expect there and what you're doing to address that?

Sure, Mark, this is Bill. As I mentioned, the census is down -- nine out of ten hospitals are reporting budget constraints due to the economic downturn. We're seeing in healthcare a decrease driven primarily by travel code or population and a reduction also in project solution type business. We're not seeing that necessarily a -- we used to always see a shortage of medical records professionals. We're not seeing that of course now as this is happening.

But some of the money that's coming into the healthcare business, the American Recovery and Reinvestment Act of 2009, and other Obama administration healthcare initiatives will require significant resources. So as we look at this, we see this is as a time to really -- this group has grown so fast, so much that we see this a time to really reorganize and restructure that group which we have done and so they can pretty dramatically increase their business development efforts.

And as we go through this and healthcare issues and the hospitals continue for I would say two, three quarters is what we're looking at, we will be taking advantage of that time to make sure that we are poised to come out of this thing in a very positive way.

So I'm not sure what else to tell you about it. We will see as the recession recovers and the census picks up back in the hospitals and the hospitals get undergoing with some profitable results, then I think our business will pick up as well.

And do you think that the spigot gets turns on as it relates to the Recovery Act by the end of this year or ...?

I really don't know how fast that money is going get out and how fast they will start computerizing their records and all of that is our sweet spot. It's not only a sweet spot in healthcare, it is also -- we have a specialized group in our technology group, and we are very, very strong in healthcare in KGS which of course can extrapolate and utilize those people in all different parts of the offerings of our firm.

So we see this as -- we're prepared for this. This will be a big win for us once it gets underway.

Great. And then last question and I'll jump off. But on the KGS side, I was wondering if Larry could talk about the areas where he's seeing specific demand and I'm interested in the sequential improvement that we saw going from Q4 to Q1 exclusive of the -- of deNovis.

Sure. And thanks a lot, Mark. Just to kind of step back and talk just a minute to the -- basically what the markets are looking like right now. With the change in the presidential administration, what they're actually doing is a broad end -- a number of initiatives which really falls well along the lines of how we are organized within our business.

The acquisition of deNovis gave us an entrée into the Veteran's Administration healthcare market which is a very large, well funded agency within the government to the tune of $55 billion a year and President Obama has increased their funding by an additional $25 billion. There's a number of healthcare objectives that he has in place and we're very well positioned with approximately 20% of our business being in the Veteran's Administration.

In addition, President Obama has also upped the funding for the intelligence operations. Obviously as we begin to withdraw from Iraq and Afghanistan over time, we've got to have ears and eyes to be able to keep abreast of the global terrorist situations that are still in the currents right now so he's actually increased that.

And acquisition of deNovis gave us the ability to be able to see into this intelligence market and included Glen Shaffer, who is a retired Major-General of the Air Force. His last job was a director of the intelligence for the Joint Chiefs of Staff of the Pentagon and Glen is very well connected and still consulted to this date by the defense agency and all -- and the intelligence apparatus. And so Glen gives us entrée into that market as well.

Another area which we also acquired through deNovis and enhanced was the Air Force global network operations where we have a prime contract and are responsible for about 75% of the Air Force as global operations with air combat command, which is our number one combat operational command.

So we're very well positioned there and in addition to that with the Legacy KGS we had very strong strengths in our finance and accounting which included the award of having the only company -- or being the only company among all the companies out there and this would include the top four KPMG, Accenture, Deloitte & Touche, PriceWaterhouseCoopers. We're the only company that's achieved six of qualified clean audit opinions into the DoD. That's not been replicated by anybody and no one's even close to that.

We can further enhance that with our data confidence which is a proprietary and registered methodology that we have for enabling information sharing collaboration across the government right now which we've managed to win some very enhanced contracts and enhanced by the fact that where they're located at the top of Homeland Security, at the top of the defense intelligence agency, at the top of other agencies within the scope of government right now. We're helping them to map out and be able to start changing business transformation.

Great. Thank you for the color.

I think you got all you wanted there, buddy.

Thanks.

You're welcome.

We'll go next to Michael Baker with Raymond James.

Thanks. I was wondering if you give a little bit of color around the clinical business -- give some sense of any change you anticipate there? And also give us an indication of the headcount -- how much of that's focused in on kind of big pharma versus biotech and how that might change over time?

This is Bill. The large bio-pharma companies certainly remain challenged with the blockbuster drug patent expirations and the lack of new approvals to overcome, the revenue declines that go along with that. They have cut back their expenses -- that's one issue that we're dealing with.

Secondly, the mega mergers that have taken place in that space are having an affect. Luckily the winners in that game have been our existing clients, but still the companies are basically freezing the hiring populations as they go through this -- the acquisition strategies that they are working in. And therefore it's hard for us to add people as certain things are happening there and we see this flat to declining revenue for the near term and possibly -- depending on when the mergers are supposed to be completed.

As you know these are very large, public companies and this may take awhile. So we're hoping that all of this is done by the end of the year. We believe because of our very strong relationships, because of how well we have branded in that space -- basically as the employer of choice -- that we will continue to be very successful.

Can you -- just to follow up -- can you give us a sense of maybe efforts to target some of the biotech companies rather than big pharma where a lot of the development effort continues?

We have -- within KCR we have a specialized group that does that and all I can tell you is that we are focused on expansion of those activities and the sales process but it takes awhile to gain the confidence. But we have the brand and the recognition in the space to be successful there, I believe.

Okay. And then I just had a follow up question on KGS and direct it towards Larry. I was wondering if you could give us a sense of the level of activity around job orders or awards -- something to give us a sense of timing and when some of this might pick up in terms of revenue recognition?

Yes, thanks. I would be glad to do that. Right now as we talked about before there has been some increase in the activity of awards which we've been a recipient of which is going to drive a strong Q2 for us.

However, there is still a problem in the government which we all read about the fact that they're just sort on acquisition professionals within the DoD and within the civil side and that has led to continued delays which we see that will continue not quite to the level of Q4 '08, Q3 '08, but it definitely will continue right now.

It's -- we have right now 25 proposals at least submitted or waiting award and approximately 12 of those proposals occurred in Q4, Q3 '08.

That's helpful. Thanks.

We'll go next to Jim Janesky with Stifel Nicolaus.

Yes, good afternoon. I'm trying to get my arms around each individual competitor in the space or companies within the space, their definition of stability. And I certainly don't blame you for using that word because it served in the year that your predecessors well who have used and those who haven't -- not as well in the market.

So does it -- what is stabilizing? It doesn't seem like revenue declines have stabilized yet. Does it feel or in talking to your clients that maybe we're just not moving on a rapid pace towards zero anymore or your margins have stabilized -- which you know you've done a good job of keeping those up in a very difficult environment? You know where does it feel like we are in this cycle?

Maybe Bill or Dave can add color since I'm the fat guy. So the way that I -- I would articulate it when we looked at how the quarter played out is revenue sequentially declined February over January, March over February. And what we saw in April across all service lines was basically a flat, week-to-week revenue string.

Now whether it stays there, I mean I would have to have a crystal ball to be able to answer that question. So revenue is stabilized albeit at a lower level than where we were in March or February or January, but in April we basically -- week-over-week it has stabilized specifically in F&A flex and technology flex.

And that's over several weeks, so there's your new definition for Webster of what relative stability means.

I answered it -- or it's the sound of the crushing hull of the Thresher -- one of the two, we haven't figured it out yet.

And are -- do you think that the stability got going back to the market share gains or do you feel that clients are starting to kind of loosen up their wallets a bit and using more of your services?

I would say it's predominantly because of market share gains. We're competing and winning on the playing field. Clients -- I can say this, that from my meetings with the clients the concerns are still there but I would say that the fear of gee, where's the bottom in this thing that we saw last year that really caused everything to freeze up because it was primarily fear driven -- that fear has somewhat mitigated.

And people are now looking at it and saying okay, it looks like we are at slow to descent and we can now start looking out instead of looking day-to-day and week-to-week and wondering when the next shoe was going to drop.

The wild card horses where there's still things like consumer debt out there, commercial real estate and other factors that are going to influence this so we're not going -- we're not going to take an economic stand here. All we can do is tell you what we've seen and that's what we've seen and we believe we're winning in the market share game.

Okay, thanks. That's very helpful.

We'll go next to Tobey Sommer with Suntrust.

Good afternoon. This is Frank in for Tobey. I wanted to focus on the technology segment a little bit. Can you talk about any areas of strength or weakness in terms of geography or individual specialties you're seeing there?

Well I'm not sure as to geography versus the quality of leadership and team in the individual market, but the market or the quarter for us happened to be New York, New Jersey which suggests that there is some strength in the east. The high skill sets and demand are security engineers, software developers, BAs, java.net -- so the people and specialty skill sets that you normally see are -- haven't changed much.

I'm going to go out on a limb here. I'm going to tell you that New York won because they did an unbelievable job in market share with the financial services collapse. These guys just flat executed and did a phenomenal job -- they have a no excuses environment. And I think New York, New Jersey for us it's grown several quarters sequentially is just flat leadership and team.

Yes, Frank, having been around the operations for over 21 years and worked in the field for many of those years, at the end of the day high quality leadership in a bad market will out perform marginal leadership in a good marketplace. So from our perspective when we look at our landscape that's what it boils down to.

Okay, great. And you may have touched on this already, but can you talk a little bit about turnover trends?

Relative to turn over when we look at our sales force, our turnover of our two flush year population has remained in single digits and our turnover of less than two year population has increased but that's by design as we continue to focus on where people are in terms of ramping up. This is a much more difficult environment for new people to ramp up in.

We continue to see our population move through ten year gates and what I mean by that is if were to go back to Q4 2007 in comparison to Q1 2009, we have 25% more people that have been here two years today than we had back at that point in time. And we have about 38% less -- less than two year people which means we're holding onto the people as they're gaining experience.

All right, great. Thank you very much.

You're welcome.

(Operator Instructions)

And we'll go next to Josh Vogel with Sidoti & Co.

Great, thank you. Just to confirm what you said earlier -- the -- and touching on the headcount that you were just talking about. Did you say it was down about seven percent sequentially and 17% year-over-year?

That's 17.1% year-over-year.

Okay. And was that just a mix of firings and voluntary? Could you maybe break that down for us?

I would say the majority of that would be attributable to performance management.

Okay. Now circling back to the clinical research business, some of your competitors have noted that in addition to just the economic pressures, the bio-pharmas some of them are looking to outsource overseas to cut costs. And I was wondering if you were losing any business to overseas outsourcing?

We hear some of the same thing, but no, we're not aware of significant business that affected us that has been transferred overseas.

Okay. And how much -- what was the impact of the reset in the payroll taxes in the quarter?

Yes, when you compare it to Q4 about $0.04. And then in our guidance we would recapture about two of those cents.

Okay.

Because we don't pick the whole four cents back up in one quarter. I mean it kind of bleeds in throughout the beginning part of the year.

Right, okay. And I may have missed this, but what -- did you guys give out what DSOs were?

No, we didn't. We didn't really it -- they're -- it's very low at this point in time.

Okay, thank you.

You're welcome.

And that does conclude our question and answer session. I'd now like to turn the call back over to Mr. Dunkel for any additional or closing remarks.

Great. We're all going to get home for dinner.

We'd like to thank everyone again for your interest and support for Kforce. And really our thanks goes out to our team for just doing a phenomenal job in very challenging conditions and so thanks to each one of you on our field and our corporate teams and our consultants and clients for allowing us the privilege of serving you again. So I'll see you next quarter. Thank you very much.

And that does conclude today's call. We do appreciate everyone's participation.